Merrill Lynch agrees to pay $18 million in IFDA case

Thursday

May 21, 2009 at 12:01 AMMay 21, 2009 at 9:15 PM

Merrill Lynch has agreed to pay $18 million to settle a case in which the financial firm is accused of selling imprudent investment tools to the Illinois Funeral Directors Association to fund a pre-need funeral trust fund that has spiraled into catastrophe.

Bruce Rushton

Merrill Lynch has agreed to pay $18 million to settle a case in which the financial firm is accused of selling imprudent investment tools to the Illinois Funeral Directors Association to fund a pre-need funeral trust fund that has spiraled into catastrophe.

It’s a record figure for the Illinois Division of Insurance, state officials say. But it’s not nearly enough, according to a lawyer for funeral homes who says losses in the fund are approaching $100 million — about $40 million more than previously reported.

“This is an attempt to issue an $18 million get-out-of-jail-free card,” said Edward Wallace, an attorney for a group of funeral homes that is suing IFDA, Merrill Lynch and others in an attempt to restore money to a trust that once held as much as $300 million and is supposed to fund funerals for more than 40,000 state residents. “We can’t understand why Mike McRaith (director of the state Division of Insurance) insists on giving Merrill Lynch this kind of protection for such a small pittance when the Division of Insurance has admitted that this bears no correlation to damages.

“We’d like the fund to be made whole, and this doesn’t do it.”

The fund’s value was written down by $59 million last fall to balance the books, and Wallace said further write-downs have been necessary.

McRaith said the settlement was based on the amount of profit Merrill Lynch earned by selling life insurance policies on funeral home directors to fund the trust. IFDA is beneficiary on the policies, but funeral home directors and state regulators say the life spans of insured funeral home directors don’t match life spans of consumers who bought funeral contracts. Furthermore, the policies don’t pay fixed benefits but rather pay out based on the performance of equities and other investments, and investments have proven poor.

The $18 million will be distributed to funeral home directors, Merrill Lynch has admitted no wrongdoing, and the state Division of Insurance, which accused Merrill Lynch of breaking state law designed to keep money safe, has agreed to take no further action.

McRaith said the fund might recover.

“Some actuaries say under some scenarios, there won’t be a deficit at all,” McRaith said. “This was a payment amount that addressed our concerns.”

Terry Plummer, a Litchfield funeral home director, said he can’t see how the fund will regain financial health. He said an actuarial study has been completed under orders from state regulators, but funeral home directors who are on the hook for losses haven’t been given access to it.

“Mike McRaith and the comptroller’s office (which regulates the pre-need funeral industry) have said ‘This works for us,’” Plummer said. “They have never asked the funeral directors for any input. It’s not right. I’ve had a few colleagues call me and say ‘Hold your nose, this is not going to smell good at all.’ … That actuarial study is under lock and key. There’s no way we’re ever going to see that.”

McRaith praised Merrill Lynch.

“Merrill Lynch, once it became aware of the magnitude of the problem and understood the seriousness with which we were approaching our consumer protection mission, they were very responsible and professional in coming to the table,” he said.

William Halldin, Merrill Lynch spokesman, said the company will continue working with Illinois regulators to address any issues.

“We agreed (to the settlement) so that we could participate in a resolution and be a part of ensuring that families get the services they’ve paid for,” Halldin said.

The Illinois Department of Professional and Financial Regulation, the agency under which the Division of Insurance operates, has resisted opening its books on the case. The department this week denied a 3-month-old Freedom of Information Act request from The State Journal-Register that asked to see correspondence from Regions Bank, which once considered taking over the troubled trust but backed out due to concerns over the insurance policies sold by Merrill Lynch.

Wallace said the department is also seeking to quash a subpoena from plaintiffs in the lawsuit against IFDA and Merrill Lynch who have asked for financial records to determine how losses mounted and what regulators did.

“I’m a bit surprised that that kind of position would be taken if the Illinois Department of Professional and Financial Regulation really wanted to assist the funeral directors in trying to determine the cause of the losses,” Wallace said. “We’d like to find out.”

In an e-mailed statement, Duane Marsh, IFDA executive director, said the association has not had a chance to analyze the settlement and so cannot comment.

The secretary of state’s office, which is seeking to revoke a license held by Ed Schainker, a Merrill Lynch financial adviser who gave investment advice to IFDA, says that after business in Illinois proved profitable, Merrill Lynch sold life insurance policies on funeral home directors in other states, including Alabama and Mississippi, to fund pre-need funeral trusts. Halldin wouldn’t say whether such sales are continuing.

“I think I’d decline comment on that,” Halldin said.

Bruce Rushton can be reached at (217) 788-1542 or bruce.rushton@sj-r.com.